Earnings Management in Corporate Accounting as a Legal Problem: a Conceptual Framework
DOI:
https://doi.org/10.21564/2225-6555.2025.2%20(28).346818Keywords:
earnings management, legal consequences, illegal earnings management, accounting policies, discretionary accruals, Securities and Exchange Commission, accounting and ethicsAbstract
The relevance of this paper lies in the interplay between accounting policies and legal ethics, which remains at the forefront of contemporary discretionary accounting practices and the attendant earnings management. The paper's quest for understanding the legal consequences is relevant for corporate managers and investors, as it provides insight into the consequences of exceeding the boundaries of allowed accounting discretion, which brings regulatory oversight to the illegality of deceitful management of corporate earnings. Accordingly, the purpose of this paper is to analyse the legal repercussions of corporate engagement in earnings management. It also aims to investigate the causative factors of managerial engagement in earnings management and to develop a framework for the phenomenon. The methodological approach focused on critical reviews and the application of doctrinal and comparative research methods to analyze related documents, including those from regulatory bodies, associated cases, and published journal articles, employing a thematic framework. The results show, on the one hand, that earnings management beyond policy limits may result in financial fraud and/or filing deceits, and that such actions could attract various legal enforcement consequences, including fines, penalties, job loss, company closures, and imprisonment, among others. On the other hand, the results also indicate that corporate management may be lured into illegal earnings management primarily to promote the company's financial outlook and to serve management's economic interests. The paper presents some promising avenues for further research. Such a future could explore the different levels of legal consequences when management exploits accounting policy loopholes, mainly to deceive investors into believing that the company is financially buoyant, versus the legal repercussions when such exploitation is primarily for management's self-financial gain, such as in earnings management and tunneling engagements. A comparison of regional differences in earnings management and differences in legal consequences could offer investors insights into which regions have more substantial legal repercussions and, therefore, stronger deterrents for managers to engage in earnings management
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